What is a Debt Consolidation Loan?: Best ways to consolidate your debt.
It is quite common that when you have a lot of bills on your list to pay, you could lose track of some of them and miss a payment. It might be that you’re struggling to keep up with all your debt or may be you want to save money on credit card bills. It would be wise to consider debt consolidation in such cases.
What is debt consolidation?
When people talk of debt consolidation, its simply a debt management system that involves rolling one or multiple debts into another form of financing or another debt with better terms. For instance, let’s say you take out a debt consolidation loan or balance transfer credit card and use it to pay off your existing debts. Although the new debt will have better terms than the previous ones making it more convenient for you.
Technically you’d want to consolidate your existing debt with a new one that has a lower Annual Percentage Rate (APR) than what you are currently paying. This helps you save money on interest, lower your monthly payments and help you pay off the debt faster.
Best debt consolidation loans
The loan terms you are facing are bound to change at any given time, as is performance relative to other lenders and lending platforms.
Also searching through multiple loan companies in search of a good debt consolidation loan that offers better rates for your credit score can be frustrating and time consuming.
To help you in your search, we have compiled a list of loan companies based on the categories that are most important to borrowers. This includes APR, repayment terms and eligibility criteria. Most of these lending platforms also let you prequalify online. This means that you can check your rates with no impact on your credit score.
Best for low rates: LightStream
Best for long repayment terms: LightStream SoFi Bank and Wells Fargo Bank
Best for high loan amounts: SoFi Bank and Wells Fargo Bank
Best for small loan amounts: Upstart and Upgrade
Best for low credit requirements: Happy Money and Upstart
Best for a peer-to-peer loan: Prosper
Best for no origination fee: LightStream, SoFi Bank
When is debt consolidation worth it?
There isn’t a particular way to approach debt management but in order for you to know if debt consolidation is the right strategy for you then you’ll need to take a good look at your finances to see if it will work. We’ve listed a few points that can help you understand what you are looking for.
Debt consolidation is a good idea for you when:
You’re struggling to manage credit card bills and loan payments
You can qualify for a lower annual percentage rate than what you’re currently paying on your debts
You want to pay off your debt faster on a set schedule
Debt consolidation is a bad idea for you when:
You owe too much more than you can manage and repay
You can’t qualify for a lower annual percentage rate than what you’re currently paying on your debts
You only have small balances that you can easily pay off quickly
How does debt consolidation work?
Although there are several ways you can use to consolidate your debt, generally all of them work the same way. You pay off one or more debts using a new debt with better terms. There are some methods of debt consolidation that are more popular than others, they include; personal loans and balance transfer credit cards.
Depending on your unique situation, your credit score, how much debt you have to consolidate, how soon you need the money, what type of debt you have and other factors — one particular method may work better than the other.
→ Personal loans:
Combine the many types of debt you owe into one fixed monthly payment with a debt consolidation loan that has better terms.
→ Balance transfer credit cards:
Consolidate all credit card debt onto a balance transfer credit card with a lower APR.
→ Home equity loans:
Tap into your home’s equity to pay off other debt by using your home as collateral.
→ Debt management plans:
Enroll in a DMP through a certified nonprofit credit counseling agency to repay your debt within three to five years.
How can you consolidate debt with a personal loan?
Here’s how you can easily consolidate your existing debt with a personal loan.
Check your credit score
Most of the available consolidation options will require a credit check. Unsecured personal loans do not require collateral which means that the lender relies more on your credit score, along with a few other factors to determine your loan worthiness.
Calculate how much you will need to borrow to satisfy your current debt.
Before going for a loan first add up all your monthly debt that you need to consolidate, this should give you a good idea on what you need to borrow. You can also use the loan to pay off credit card debt, high interest debt and payday loans
Determine the APR that you need to save money
The APR of the new loan you are going to collect should definitely be lower than what you are currently paying on your current debt. This is the main reason you are taking the loan and this is what makes the loan beneficial to you.
Compare APRs by prequalifying with multiple lenders
Many lenders will let you prequalify for a personal loan so that you have an idea of what your potential APR would be without impacting your credit score. With this, you can compare estimated loan offers before formally applying for them.
Formally apply for the loan
After performing all the steps and fulfilling all requirements, you can proceed with your application. If your loan is approved, the lender then deposits the funds into your bank account. You’ve gotten your debt consolidation loan and you can use that money to pay off any kind of debt you’re owing.
3 Major benefits of debt consolidation
- Track debt repayment
After using a loan to consolidate your debts, regardless of which particular method you use, you will have only one debt to pay off. This makes it a whole lot easier to track debt repayment. It also helps you to stay on top of your finances and set a better strategy that will make it easier for you to pay off that loan.
- Save money on interest
Since you are using a loan with a lower interest rate and better terms to pay off your current debt then you’ll surely save money on interest. The reduction in interest rate will help you save the money that you would have been required to pay if you had not consolidated.
- Build your credit score
Clearing your credit card debt with a loan can have an immediate effect on your credit score by lowering your credit utilization ratio. This is the total amount of credit that is available to you versus the amount of credit card debt you have.
Is there any difference between Debt consolidation and debt relief?
Debt consolidation requires you to take out a new loan or credit card to repay your current debt on better terms, debt relief is a process of reducing the amount of debt you owe through negotiation or legal means. Debt releit can come in many forms, such as debt settlement, credit counseling and bankruptcy.
Debt settlement is a means or negotiating with your creditors to reduce the amount of debt you owe and reduce the fees that are charged to your account. There are some companies that offer this servit but these programs come with very high fees and can negatively damage your credit.
Credit counseling is a non-profit service that seeks to help you manage expenses and debt payments much more effectively. A credit counselor may set you up on a good debt management plan and can even negotiate debts and monthly payments on your behalf.
Bankruptcy is a legal process that offers debt relief to an individual or business. When you file for bankruptcy, you may be enrolled in a court ordered debt repayment plan, or your assets may be sold to repay your creditors.
Debt consolidation is a good idea for you to pay off your debt and also boost your credit. Before getting a loan to consolidate your debt however, make sure it will benefit you and have a positive impact not a negative one.
Once you have consolidated multiple debt with one loan, it is easier to focus on this single debt and pay it off faster.
Debt consolidation is good only if it favors you so if you think it will be a good option for you then waste no time and stop paying higher fees on your current debt and opt for one that will have lesser fees, better interest rate and better terms.